The court asserts IBC’s supremacy, safeguarding corporate debtor’s assets during insolvency resolution despite GIDC’s attempts at eviction.
In a landmark judgment, the Gujarat High Court has reinforced the protective provisions under the Insolvency and Bankruptcy Code (IBC) 2016, emphasizing the inviolability of moratorium provisions that shield corporate debtors' assets during the insolvency resolution process. The court invalidated the actions of the Gujarat Industrial Development Corporation (GIDC) aimed at terminating a lease and evicting Gujarat Hydrocarbons and Power SEZ Limited, the corporate debtor, during the moratorium period.
The division bench comprising Chief Justice Sunita Agarwal and Justice D.N. Ray ruled against GIDC's termination of the lease and subsequent eviction orders under the Gujarat Public Premises (Eviction of Unauthorized Occupants) Act, 1972, during the moratorium period. The court held that such actions were prohibited under Section 14(1)(d) of the IBC, which aims to preserve the assets of the corporate debtor and ensure its continuity as a going concern.
The judgment highlights the overriding effect of IBC over other laws, as enshrined in Section 238, thereby rendering eviction orders inconsistent with the IBC provisions. The court underscored the legislative intent of maintaining status quo during the corporate insolvency resolution process (CIRP), which is crucial for the maximization of value for all stakeholders.
The court deliberated extensively on the statutory provisions of the IBC, examining Sections 14, 25, 31, and 238, to affirm that the leasehold rights over the land constituted part of the corporate debtor's property. It rejected GIDC's argument that the termination was due to breaches of the lease agreement rather than insolvency, stating that the legislative scheme of the IBC seeks to prevent any actions that could disrupt the corporate debtor's operations during CIRP.
Moreover, the court noted that GIDC, as an operational creditor, had lodged its claim during the CIRP, which was addressed within the approved resolution plan. This plan binds all stakeholders, including GIDC, thereby precluding it from asserting higher rights than financial creditors.
The judgment resonates with previous Supreme Court rulings, including the case of Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., emphasizing that upon approval of a resolution plan, all claims are frozen and binding on stakeholders, including governmental entities.
This decision reinforces the IBC’s framework designed to support the revival of corporate debtors rather than liquidation, ensuring they remain going concerns during the insolvency process. It sends a strong message on the sanctity of moratorium provisions, marking a significant step in safeguarding the assets and business interests of corporate debtors in insolvency situations.
Bottom line:-
Under Section 14(1)(d) of the Insolvency and Bankruptcy Code, 2016 (IBC), recovery of property by a lessor from a corporate debtor during the moratorium period is prohibited. Termination of lease and eviction orders passed during this period are non est and illegal as they contravene the statutory moratorium provisions aimed at preserving the corporate debtor's assets and ensuring its continuity as a going concern.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Sections 14(1)(d), 31, 238
